GME, Reddit, Robinhood, and Social Media: Why Investors Should Care
One of the biggest news stories last month was the heightened trading activity and price volatility of GameStop and several other companies. These company’s stocks were targeted by participants using the social media platform Reddit. Reddit supported the social media conversations among its members, and Robinhood was the trading app of choice for buying and selling stocks of GameStop, KOSS, AMC Entertainment Holdings, and others. While the event has gained regulators' attention, it is still too early to tell if new regulations or policies will be enacted.
Why should investors care if this event didn't directly impact them? Here are a few reasons that explain how this event and the new era of investing is changing:
Social Media’s impact on the stock market- This event (and others) has shown that some people are reactive to FOMO (Fear of missing out) trading as they watch social media comments posting from others on the social platform. This isn’t reserved to just social media, but also discussions people have among themselves, leading investors open to risk when they follow others. In this latest event, we are aware of the impact social media has on our society.
Isolated Events can create market manipulation, which is illegal, hard to prove, and causes a security price to inflate or deflate for some time. Over the past years, there have been market manipulation events, but the latest was the most considerable rise and fall of stock prices in a single week.
New investors entered the stock market using complex trading actions- Individual investors involved in the GME/Reddit event were purchasing options instead of stocks or ETFs:
“Reddit users also cheered the trade as a way to drive massive losses at short-selling hedge funds. Language on Wall Street Bets took on a populist tone that pitted the everyday trader against the Wall Street establishment.” - Markets Insider, February 11, 2021.
Inexperienced investors did complicated investing in this event as additional money available to them has made its way to Wall Street. Options investing is typically performed by fund managers to make money for portfolios and only after extensive research. Fund managers or professional traders do not use this complex type of investing in targeting and hurting Wall Street or other investors who rely on our stock market system to produce positive returns for their portfolios.
This unusual event shouldn’t change your overall investing strategy because events like this are short-term. Continue to work with your financial professional and ask questions about specific investments you are considering basing on public information. And remember that time in the market beats timing the market when it comes to saving for retirement.